Definition
Certificate of Deposit (CD) is a financial product issued by banks or credit unions that allows depositors to invest a fixed amount of money for a predetermined term at a guaranteed interest rate. Early withdrawals may incur penalties.
Why It Matters
CDs provide a secure way to earn interest with low risk. They are often used for short- to medium-term savings goals, portfolio diversification, and capital preservation. Because the interest rate is fixed, depositors can predict returns over the CD's term.
Example
If a depositor invests $10,000 in a 12-month CD at 4% annual interest, they are guaranteed $400 in interest at the end of the term. Withdrawing funds before maturity could result in a penalty, reducing the total return.